– Eurozone equities declined. In addition to worries over global growth and trade, there was nervousness surrounding the Italian 2019 budget proposal, which was rejected by the European Commission.

– The UK’s FTSE All-Share fell over the month but it outperformed global equities during a very challenging month. A number of large companies in lower risk sectors bucked the market declines.

– Japanese equities fell steeply with economically-sensitive areas of the market – such as shipping – leading the declines. The yen strengthened slightly against the dollar as global uncertainty continued to increase.

– Emerging markets equities lost value. Mexico was the weakest index country with equities and the peso selling off sharply on rising concerns over the incoming government’s policies. Brazilian equities rallied in anticipation of a market-friendly election outcome, confirmed at the end of the month.

– US government bond yields continued higher (i.e. prices fell) in October on positive economic data and Fed’s policy trajectory. Outside the US, government yields mostly declined.

Please note any past performance mentioned in this document is not a guide to future performance and may not be repeated.

US

In the US, investor concerns over the durability of earnings strength and the economic cycle added to numerous ongoing geopolitical issues that have hampered markets this year, and equity markets were sharply lower. This led investors to question how much longer the historic equity bull market of consistently rising prices will continue.

In aggregate, leading economic indicators remain broadly stable but do indeed point towards more hawkish Fed policy. The US labour market remains exceptionally tight. Unemployment dropped to 3.7% from 3.9% in September; its lowest point in almost half a century. Wage growth remains robust at 2.8%. Indeed, Federal Open Market Committee notes indicate that businesses across the nation are reporting “difficulty finding qualified workers”, suggesting wage growth should persist.

Softer earnings releases from tech giants Amazon and Alphabet seemed, initially, to confirm the fears over earnings strength. However, so far the Q3 earnings season continues to suggest strong corporate momentum. Through the month, traditionally cyclically-sensitive[1] sectors – such as energy and industrials - declined most noticeably. More defensive areas held up comparatively well.

Eurozone

In common with other regional equity markets, eurozone shares had a tough October and the MSCI EMU index returned -6.5%. A combination of factors contributed to the weak returns, including tightening global financial conditions, trade concerns, the ongoing dispute over Italy’s budget, and some weaker corporate earnings. Individual stock moves were very volatile over the month, particularly in reaction to earnings announcements. The weakest sectors overall in the eurozone were materials and information technology. Certain IT stocks, such as STMicroelectronics, were among those to deliver disappointing earnings. Telecommunication services was the only sector to post a positive return.

On the economic front, GDP data confirmed a slowdown in the eurozone economy, with a 0.2% quarter-on-quarter growth rate in Q3 compared to 0.4% in Q2. Forward-looking surveys also softened: the flash composite purchasing managers’ index[2] for October came in at a 25-month low of 52.7, down from 54.1 in September. As expected, the European Central Bank made no change to monetary policy. It still expects to end net asset purchases by year-end and to keep policy rates unchanged at least until after summer 2019.

Italy’s draft 2019 budget was rejected by the European Commission, giving a three-week deadline for Italy to respond with a new draft or potentially face fines. However, ratings agency Moody’s kept the country’s debt rating at investment grade, rather than downgrading to junk as some had feared. (Investment grade bonds are the highest quality bonds as assessed by a credit ratings agency. Non-investment grade bonds are deemed more speculative.)

UK

The defensive merits of the UK stock market saw it outperform global equities during a very challenging month. A number of defensive large caps bucked the market declines and as a result the FTSE 100 held up relatively well, retreating 4.9%.

Lower down the market capitalisation scale, uncertainty around Brexit and a number of stock-specific disappointments weighed heavily on returns. The FTSE 250 (ex investment companies) index fell by 7.0% and the FTSE Small Cap (ex investment companies) retreated by 7.1%. The FTSE All-Share returned -5.2%.

The UK Budget was brought forward to October in order to avoid a clash with Brexit negotiations, and the Office for Budget Responsibility (OBR) published its revised growth forecasts for the UK economy. The economic advisory body revised real GDP growth for 2018 down from 1.5% to 1.3% (primarily due to the poor weather in Q1), but upgraded forecasts further out.

The OBR said that its forecasts were predicated on an orderly departure from the EU next March. A disorderly exit would have “severe short-term implications” for the economy, the level of sterling, asset prices and public finances, although the scale of the impact would be hard to predict given the lack of a precedent, said the OBR.

Japan

Japanese equities fell steeply during October, ending the month the month 9.4% lower. The yen strengthened slightly against the dollar, especially in the first half of the month, as global uncertainty continued to increase. All sectors fell in October, with the declines led by shipping companies together with other economically-sensitive areas, such as steel, chemicals and machinery. The most notable feature of the market environment was the underperformance of many of the growth stocks which have led the market in recent quarters. Value stocks tended to be hit less hard in the market decline which resulted in outperformance from many financial-related sectors, including banks. (Growth stocks are those whose earnings are expected to grow at an above-average rate relative to the market. Value stocks tend to trade at a lower price relative to fundamentals, e.g. dividends, earnings and sales).

The primary influences on equity investor sentiment appear to have been the ongoing escalation of trade issues and the anticipation of further increases in US interest rates as the Federal Reserve attempts to regulate the US economy. The abrupt short-term reversal in market leadership also suggests that a degree of unwinding was overdue in stocks with stretched valuations.

From Japan’s perspective, very little actually changed during the month. The Bank of Japan’s regular policy committee meeting resulted in no change to monetary policy, as expected. Economic data released during the month was somewhat mixed, with industrial production much weaker than expected, but all recent data needs to be viewed in the context of the natural disasters affecting Japan in recent months.

One surprise was the earlier than expected confirmation that the next increase in consumption tax will go ahead as planned in October 20198. In addition to a range of exemptions from the higher rate, the government is also planning a series of stimulus measures designed to mitigate the type of economic dislocation seen around previous tax increases.

Asia (ex Japan)

Asia ex Japan stocks suffered sharp losses in October amid the global sell-off in equities. Markets were buffeted by fears about China’s slowing economic growth and trade tensions with the US, while the pace of US interest rate hikes was another concern.

China’s economy expanded by 6.5% year-on-year in the third quarter, its weakest quarterly growth since the global financial crisis. Industrial production fell in September, though retail sales growth accelerated. The central bank lowered the amount of cash that banks must hold as reserves in a bid to spur growth. Meanwhile, regulators stepped up efforts to bolster market sentiment, including supporting share buybacks and encouraging private equity funds to buy shares in listed firms. Even so, the renminbi slid against the US dollar and Chinese stocks ended the month with double-digit losses. Hong Kong equities also retreated.

In South Korea, concerns over the weakening global economic outlook weighed on its export-oriented economy. The government unveiled fresh measures to revive economic growth and create jobs. Shares in Taiwan were dragged lower by declines in the energy and information technology sectors. Indian equities lost ground as the rupee hit a record low against the US dollar following the Reserve Bank of India’s surprise decision to keep interest rates unchanged. The currency was also hurt by reports of a widening rift between the government and the central bank. In comparison, ASEAN (Association of Southeast Asian Nations) markets such as the Philippines and Indonesia fared better, though they also posted negative returns.

Emerging markets

Emerging markets (EM) equities lost value in October, with global growth and trade uncertainty driving risk aversion. Weak corporate earnings were also a headwind in several markets, notably in Asian EM. The MSCI Emerging Markets index decreased in value and underperformed the MSCI World.

Korea was among the weakest index markets with weak macroeconomic data and ongoing global trade concerns compounded by disappointing corporate earnings results. Taiwan, where technology stocks were among the weakest names, and China also corrected and lagged the index. In China, Q3 GDP growth slowed by more than expected to 6.5% year-on-year. Meanwhile high frequency survey data remained subdued and the authorities announced a series of measures aimed at supporting the economy, including a 1% cut to reserve ratio requirements for banks.

Mexico was the weakest index market as equities and the peso sold off sharply on rising concerns over the incoming government’s policies, and the implications for investment. A public referendum rejected the building of a new airport in Mexico City (which is already one-third complete).

By contrast, Brazilian equities and the real rallied in anticipation of a market-friendly election outcome, which was confirmed at the end of the month.

Global bonds

US government bond yields continued higher in October. Economic data remained positive, and stronger than in other regions, while Fed Chair Jerome Powell indicated there remains significant scope for further rate hikes. Ten-year yields increased from 3.06% to 3.15% and the two-year yield from 2.82% to 2.87%. This ran counter to a broader trend towards les risky assets, which propelled the US dollar index to gains of 2%.

Outside the US, government yields mostly declined. UK 10-year yields fell from 1.57% to 1.44% amid expectations the Autumn Budget would confirm an ongoing reduction in government borrowing, while September inflation data undershot expectations.

In Europe, Bund 10-year yields fell from 0.47% to 0.39%, France’s from 0.80% to 0.75%, as eurozone data remained broadly lacklustre and uncertainty around Italy continued. Italian 10-year yields increased from 3.15% to 3.43%. The ratings agency Moody’s cut Italy’s sovereign rating to one notch above sub-investment grade, citing concern over the country’s recently announced budget.

Global investment grade[3] (IG) corporate bonds saw a total return of -0.9% (in local currencies). US dollar IG was weakest in total return terms (-1.4%), with sterling IG returning 0.4%, but underperformance relative to government bonds was consistent across markets.

Global high yield (HY) credit saw total returns of -1.3%. The US dollar market saw total returns of -1.6%, underperforming Treasuries. Euro HY saw a similar level of underperformance relative to government bonds.

Emerging market (EM) bonds saw negative total returns. Performance across EM currencies was mixed. Idiosyncratic events saw weakness in the Mexican peso and the South African rand, while an improvement of sentiment for the Argentinian peso and the Turkish lira saw these currencies achieve double-digit returns.

Global stock markets were hit hard with investors switching into a risk-off mode. The MSCI World index returned -7.6% in October. Convertible bonds as measured by the Thomson Reuters Global Focus Convertible Index provided effective protection and ended the month with a return of -2.9% in US dollar terms. With this significant market move the risk/return characteristics of convertible bonds have significantly improved and so have valuations. Japan and Asia remain the cheapest regional convertible markets.

Commodities

The S&P GSCI Spot Index fell 6.2% in October. Energy was the weakest component as spot prices fell on concerns over increased supply, with Brent crude down 11%. During the month, Saudi Araba announced that it will increase output to a record high, easing uncertainty over the impact of US sanctions re-implementation on Iran. The industrial metals component also declined, weighed down by US-China trade concerns and weaker macroeconomic data in China. Precious metals were mixed with gold gaining 1.9% and silver down 3.1%.

The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested

[1] Cyclical stocks are those whose business performance and share prices are directly related to the economic or business cycle. Defensives are those whose business performance is not highly correlated with the larger economic cycle - these companies are often seen as good investments when the economy sours.

[2] The eurozone purchasing managers’ index is produced by IHS Markit and based on survey data from around 5,000 companies based in the euro area manufacturing and service sectors. A reading above 50 indicates expansion.

[3] Investment grade bonds are the highest quality bonds as determined by a credit ratings agency. High yield bonds are more speculative, with a credit rating below investment grade.

Important information

This site is designed for Professional Investors. We define "Professional Investors" as those who have the appropriate expertise and knowledge e.g. asset managers, distributors and financial intermediaries. You should not use this site if you do not fall within this category.

Schroder Investment Management (Europe) S.A. is the management company (the "Management Company") of Schroder International Selection Fund ("Schroder ISF") and Schroder Global Alternative Investor Access ("Schroder GAIA") (each a "Company" and collectively referred to as the "Companies").

The Companies are umbrella structured open-ended investment companies organised as "société anonyme" under the laws of the Grand Duchy of Luxembourg and qualifies as a Société d'Investissement a Capital Variable. Schroder ISF, Schroder GAIA and Schroder SSF qualify as SICAVs under Part I of the law of 17 December 2010 regarding undertaking for collective investment. Schroder AS is regulated by the provisions of Part II of the law of 17 December 2010 regarding undertaking for collective investment. The Companies operate sub-funds, each having a specific portfolio of assets and liabilities within the Companies, with its own net asset (the "Funds").The Management Company is subject to the requirements of the Management Company Directive 2010/43/EC, as implemented in Luxembourg.

The Management Company only gives information on its products and services and does not provide investment advice based on individual circumstances. If you are in any doubt about whether an investment is suitable, you should seek independent advice.

Please read this disclaimer below and agree to the terms before you can access the website.

Past performance is not a guide to future performance. The value of investments and the income from them may go down as well as up and investors may not get back the amount originally invested. Any past performance figures shown are not indicative of future performance. Exchange rate may vary and cause the value of international investments to rise or fall. The levels and reliefs from taxation may change. Tax reliefs referred to are those currently available and their value depends on the circumstances of the individual investor. Investment in emerging markets involves a high degree of risk. Investment in any Fund mentioned herein should not be made without careful reference to the relevant prospectus. The information contained in these pages does not form part of any contract, nor can you rely on it for any contractual purpose.

The information contained on this site is not an invitation to subscribe. Subscriptions will only be received and shares issued on the basis of a Fund's current prospectus and the latest audited annual report. Copies of each Fund's current prospectus and the latest audited annual report may be obtained from the Management Company or your Schroders branch office.

Disclaimer of Warranty and Limitation of Liability.

The Management Company believes that the provided information is accurate as at the date of publication but no warranty of accuracy is given and no liability in respect of any error or omission by a third party is accepted by the Management Company or its affiliates or any director or employee of the Management Company or its affiliates.

In the event of any provision of these Terms and Conditions being deemed unenforceable, the remaining terms and provisions shall be unimpaired and the unenforceable term or provision shall be replaced by an enforceable term or provision that comes closest to the intention underlying the unenforceable term or provision.

The Management Company may modify these Terms and Conditions at any time, with immediate effect and without prior notice.

Privacy

The Management Company is as concerned as you are about the privacy of any personal information you may provide to us through this site. When you visit this site, you are not required to provide us with any personal information other than your country of residence, unless you choose to do so. Our web server will not recognize your domain name or e-mail address, only your indicated country of residence.

Schroders' web sites use "cookies" for collecting user information from certain pages of the web sites. By "cookie" we mean the small text file that is stored on the hard disk of a computer by the web browser on a computer. It contains information sent by the web server of the web site that a user has visited. A cookie identifies users and can store information about them and their use of a site. Schroders uses cookies to keep track of user activity and to store a user's username and password to allow the user access to some of its protected web sites. The information derived from cookies enables Schroders to identify which areas of the web site are more interesting so that we can improve our web sites and the information we provide to users. The cookies that Schroders uses to store user name and passwords are encrypted and cannot be read. A user can choose not to accept certain cookies by turning this feature 'off' within the browser settings, however doing this may detract from 'user experience' of certain web sites or even prevent access to some of our websites.

Use of Links

This website (the "Website") may contain links to websites published by third parties. Links to this Website may also be included on third party websites. The Management Company has not reviewed any of the third party website which link to the Website or to which the Website links. It is not responsible for the content to be found directly or indirectly on any third-party website nor does it endorse or recommend the products and services presented on any such third-party website. Following links to any third-party website or pages shall be at your own risk.

The Website and the information or other material contained in it are not directed to, or intended for distribution to, or use by, any person or entity who is a citizen or resident of, or incorporated or located in any jurisdiction where such distribution, publication, availability or use would be contrary to local laws or regulations, or where the Management Company would infringe any registration or licensing requirement within such jurisdiction.

Electronic Mail Function

The possibility to communicate by e-mail between you and the Management Company is only a convenience granted by the Management Company. You acknowledge the limitations on the reliability of delivery, timeliness and security of internet e-mail and understand that the Management Company will not be responsible for any loss or damage that could result from your requests not being accepted, confirmed or processed or as a result of your e-mails being intercepted by third parties. As a result of these concerns, you should not send sensitive information by e-mail, which may not be secure. If you do so, you do it at your own risk.

Intellectual Property Rights

The information and materials contained in the Website are protected by intellectual property rights, which are owned or claimed by the Management Company, its affiliated entities or third parties. The information and materials may be displayed and printed exclusively for your personal, non-commercial use, provided that you do not remove any intellectual property right or other notices therein. You agree not to transmit, reproduce or sell the information and materials contained in this Website in whatever form and by whatever means without the express prior written consent of the Management Company.

Applicable Law and Jurisdiction

Your access to, visit to and use of the Website, and the present Terms and Conditions are governed by and shall be construed in accordance with Luxembourg law. The Courts of Luxembourg shall have exclusive jurisdiction over any dispute relating thereto, without prejudice to the choice of the Management Company for having any other court jurisdiction over such a dispute under any applicable law.

MSCI Disclaimer:Source: MSCI

The information obtained from MSCI and other data providers, included in reports available from this website, may only be used for your internal use, may not be reproduced or re-disseminated in any form and may not be used to create any financial instruments or products or any indices. The MSCI information and that of other data providers is provided on an 'as is' basis and the user of this information assumes the entire risk of any use made of this information. MSCI, each of its affiliates and each other person involved in or related to compiling or creating any MSCI information (collectively, the "MSCI Parties") and other data providers, expressly disclaim all warranties (including, without limitation any warranties of originality, accuracy, completeness, timeliness, non-infringement, merchantability and fitness for a particular purpose) with respect to this information. Without limiting any of the foregoing, in no event shall any MSCI Party or other data provider have any liability for any direct, indirect, special, incidental, punitive, consequential (including, without limitation, lost profits) or any other damages.

Schroders uses cookies to personalise and improve your site experience. You can accept all cookies by selecting 'I agree' and continuing to browse the site or you can "Manage cookies"to apply only the categories of your choosing. Find out more details on how we use your information in our “Cookie Policy”